Is Labor Market Regulation at the Root of Unemployment?: The Case of Germany and the Netherlands

Ronald Schettkat

in Fighting Unemployment

Published in print February 2005 | ISBN: 9780195165845
Published online July 2005 | e-ISBN: 9780199835515 | DOI:
 Is Labor Market Regulation at the Root of Unemployment?: The Case of Germany and the Netherlands

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While the Netherlands experienced high unemployment in the late 1980s, it outperformed the United States in the early 1990s and has done so since 1997. Germany’s high unemployment is entirely a post-unification phenomenon; it was not until 1993 that Germany’s unemployment rate was higher than that of the United States. The author argues that despite Dutch reforms, by the late 1990s their regulations still tended to be stronger and social protection spending more generous than Germany’s. Wage and skill dispersion are quite similar, as are the unemployment benefit systems. The answer lies elsewhere. The Netherlands has been distinguished by high levels of part-time employment, particularly among women, and has experienced substantially slower wage growth (partially compensated for by tax cuts), which contributed to an export boom. The key to the Dutch success has been a consistent mix of monetary, fiscal and wage policies. In contrast, in Germany the politics of the unification process helped produce both large public debts and substantial growth in real wages. The response was fiscal austerity, tight monetary policy, and a rise in social security payments levied on both employers and employees. The chapter concludes that the policy debate has greatly overemphasized the role of supply-side work incentives (regulations and benefits) and neglected the role of consistent wage bargaining, tax, and macroeconomic policies.

Keywords: flexibility; welfare state; labor market; regulation; deregulation; unemployment; employment; labor market institutions; unemployment benefits; wages; wage inequality; labor costs; collective bargaining; Germany; unification; Netherlands

Chapter.  9379 words. 

Subjects: Macroeconomics and Monetary Economics

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